GOLD ANALYSIS

Gold's soft underbelly - it's the (lack of) cash, stupid!

Some major listed gold stocks are the unwitting dogs among 2009's global mining performers.

Author: Barry Sergeant
Posted: Tuesday , 08 Dec 2009

JOHANNESBURG - 

A survey of pricing patterns for more than 400 listed gold stocks across the world (with a market value of at least USD 10m each) unleashes some facets of a fascinating investor psychosis. Despite recent record dollar gold bullion prices, the 100 least-wanted of these gold stocks are currently trading way below price-highs seen during 2009, an average of 48% less, measured on a weighted basis.

These are not penny stocks: the list of 100 carries an aggregate market value of USD 10.8bn, dominated by Harmony, the South African stock which represents the general case of battling various headwinds idiosyncratic to the country. Harmony currently sources all its gold from South Africa, where an inordinately strong rand has pressured all miners and exporters across 2009. The upshot is that Harmony has this year delivered the weakest performance of global Tier I gold stocks; South Africa-based AngloGold Ashanti and Gold Fields have done far better; both mine substantial ounces outside South Africa.

 But the pricing of gold stocks remains largely mystifying. Leaving aside the gold dogs, pricing at the other end of the scale also suggests that investors are increasingly weary of the gold story, whatever it may be. Dollar gold bullion hardly solves the mystery. The price pierced USD 1,000 an ounce in March 2008, upon the collapse of investment bank Bear Stearns on Wall Street, and nearly made the same level in March 2009.

Bullion moved decisively through USD 1,000 an ounce in September 2009, USD 1,100 in November, and moved above USD 1,200 this month, topping USD 1,226.56 on 3 December. Goldcorp, a relatively new generation global Tier I gold digger,  saw its price move from above USD 48.00 to around USD 17.00 a share during 2008; the price has moved up to USD 46.00 this year, and has retraced about USD 5.00 a share from those highs. Over the past two years, the stock price has done less than nothing.

Newmont, a long-established Tier I giant, saw its stock price top out at USD 60.00 a share early in 2006; from lows around the USD 24.00 mark a year ago, the stock has moved up to as high as USD 56.45 this year. Over the same period, AngloGold Ashanti moved also from USD 60.00 a share, to below USD 14.00, and has recovered to around the USD 43.00 a share level. Over four years, the two stocks have also done less than nothing.         

Global tier I gold stocks
	Stock	From	From	Value
	price	high*	low*	USD bn
Yamana	USD 12.58	-12.5%	154.1%	9.225
Goldcorp	USD 41.33	-10.6%	79.5%	30.285
Polyus	USD 53.50	-9.9%	148.8%	10.199
Harmony	ZAR 80.00	-39.8%	16.4%	4.555
Lihir	AUD 3.36	-10.9%	54.1%	7.257
AngloGold Ashanti	USD 42.79	-10.0%	90.2%	15.498
Zijin	CNY 10.52	-14.4%	179.8%	16.234
Barrick	USD 42.44	-11.6%	66.2%	41.725
Newcrest	AUD 35.75	-10.1%	43.6%	15.767
Gold Fields	ZAR 106.00	-15.2%	39.1%	10.650
Kinross	USD 20.00	-16.4%	46.8%	13.916
Newmont	USD 51.83	-8.2%	71.9%	24.899
Buenaventura	USD 37.54	-12.1%	168.1%	10.319
Freeport-McMoRan	USD 78.69	-9.9%	321.7%	33.827
[[SPDR Gold Shares ETF]]	USD 113.11	-5.4%	50.2%	41.919
Tier I averages/total		-13.7%	105.7%	244.357
Weighted averages		-12.1%	92.8%
* 12-month

A decade ago, bullion hit low points of USD 250 an ounce, before confirming a bull market, early in 2002, just as the dollar entered a protracted bear market, still present today. Bullion would move from below USD 400 an ounce in 2004 to an inter-cyclical peak above USD 700 in May 2006, explaining the excitement around gold stocks early in 2006.

Gold producers are finding it increasingly difficult to generate profits, which are increasingly complicated to express under dazed modern accounting rules. But no gold miner can escape from the challenge that generating free cash flow is now agonizingly difficult. Free cash flow is simply operating cash flow, less cash laid out on capital expenditure.

Since the start of 2007 (and excluding the fourth quarter of 2009), eight of the world's Tier I gold stocks - AngloGold Ashanti, Barrick, Goldcorp, Newmont, Yamana, Kinross, Harmony, and Gold Fields - have generated negative free cash flow of USD 3.2bn (for the first nine months of this year, in line with rising bullion prices, generation of free cash flow has been positive to the tune of USD 1.1bn).

Cash flow deficits have been financed by raising fresh equity, to the tune of USD 10.1bn, raising fresh debt, and selling assets. These eight gold companies have been determined, however, to create a lively impression, paying an astonishing USD 2.7bn in cash dividends over the period. Cash has often moved around in circles, rather than from profitable gold mines to shareholders.

Compare this with Freeport-McMoRan, which ranks as one of the world's biggest gold miners, but suffers no illusions, preferring to focus on its status as the world's biggest publicly traded copper miner (and also No 1 in molybdenum, and a growing global force in cobalt). Freeport-McMoRan has over the past near-three years generated a positive USD 6.8bn in free cash flow, despite a collapse in copper prices in mid-2008 

EIGHT GOLD MAJORS*
USD m	9m09	9m08	2008	2007	Total
Free cash flow
Operating cash flow	7,403.1	5,313.6	7,068.6	4,740.6	19,212.3
Capital expenditure	-6,265.1	-6,551.2	-9,078.5	-7,062.1	-22,405.7
Free cash flow	1,138.0	-1,237.6	-2,009.9	-2,321.5	-3,193.4
Equity raised	5,993.8	1,990.1	2,264.4	1,816.5	10,074.7
Dividends	-744.3	-800.8	-995.2	-916.3	-2,655.8
Freeport-McMoRan
Free cash flow
Operating cash flow	2,850.0	3,169.0	3,370.0	6,225.0	12,445.0
Capital expenditure	-1,138.0	-1,929.0	-2,708.0	-1,755.0	-5,601.0
Free cash flow	1,712.0	1,240.0	662.0	4,470.0	6,844.0
Equity raised	740.0	-500.0	-500.0	2,816.0	3,056.0
Dividends	-181.0	-695.0	-948.0	-596.0	-1,725.0
* Barrick, Goldcorp, Kinross, Newmont, AngloGold Ashanti, Gold Fields, Harmony, Yamana

Despite outclassing the entire combine of eight of the world's top gold companies, this humble copper miner sits with a market value of USD 34bn, compared to the aggregated USD 151bn of the eight gold diggers.

MARKET VALUES	USD bn
AngloGold Ashanti	15.498
Barrick	41.725
Goldcorp	30.285
Newmont	24.899
Yamana	9.225
Kinross	13.916
Harmony	4.555
Gold Fields	10.650
Total	150.754
Freeport-McMoRan	33.827

So far this year, from a pricing viewpoint, listed gold stocks have returned the least among global mining subsectors, second only to uranium stocks, a far smaller grouping, dogged by rotten spot prices. Copper stocks have done exceptionally well, reflecting the cash generating power possessed by diggers of the orange metal. Export iron ore miners, of which there are but a handful in the world, have increasingly confirmed mastery of the art of cash generation. The world's three biggest mining stocks, by value, are No 3, No 1, and No 2 in the export iron ore sector, in the form of BHP Billiton, Vale, and Rio Tinto.

In early June 2009, Rio Tinto and BHP Billiton announced that BHP Billiton would pay Rio Tinto USD 5.8bn "for equity type interests at financial close" to take its interest in the two companies' Pilbara, Australia iron ore joint venture from 45% to 50%. This values the full joint venture at USD 116bn, finalised this week. In its fiscal year to 30 June 2009, BHP Billiton generated free cash flow of USD 7.8bn, with iron ore ranking as the single biggest contributor. None of the three big miners operate primary gold mines.

GOLD'S HOUSE OF PAIN
	Stock	From	From	Value
	price	high*	low*	USD bn
Apex Minerals	AUD 0.04	-90.1%	5.1%	0.124
Crew Gold	CAD 0.17	-89.1%	3.1%	0.017
Azteca Gold	CAD 0.09	-84.8%	142.9%	0.016
KIG Mining	EUR 0.19	-81.5%	1392.3%	0.014
ATW Gold	CAD 0.20	-79.5%	30.0%	0.014
Central Rand	ZAR 1.90	-76.3%	0.0%	0.063
Bear Lake Gold	CAD 0.21	-72.4%	27.3%	0.018
IGE	NOK 0.29	-70.3%	26.1%	0.040
First Uranium	CAD 2.41	-69.9%	47.9%	0.382
Aldridge	CAD 1.05	-67.2%	38.2%	0.023
Gold One	AUD 0.33	-66.8%	62.5%	0.239
New Guinea Gold	CAD 0.13	-65.3%	19.0%	0.019
Macarthur Minerals	CAD 0.90	-62.5%	38.5%	0.018
Northern Freegold	CAD 0.29	-61.3%	114.8%	0.019
Mintails	AUD 0.04	-61.1%	66.7%	0.031
Orsu Metals	CAD 0.63	-60.6%	57.5%	0.027
Barra Resources	AUD 0.09	-60.5%	112.2%	0.025
Douglas Lake	USD 0.28	-59.4%	133.3%	0.020
China Goldmines	GBP 0.12	-58.5%	6.5%	0.010
Galantas Gold	CAD 0.06	-57.7%	175.0%	0.010
Citigold	AUD 0.15	-56.5%	11.1%	0.123
Avnel Gold	CAD 0.13	-55.2%	550.0%	0.010
DRDGold	ZAR 4.30	-55.0%	34.4%	0.219
Caledonia	CAD 0.06	-53.8%	140.0%	0.029
Helio Resource	CAD 0.42	-53.8%	162.5%	0.026
Gold Hawk	CAD 0.04	-53.3%	250.0%	0.011
Lake Victoria Mining	USD 0.70	-53.0%	105.9%	0.020
Rusoro Mining	CAD 0.46	-51.1%	95.7%	0.231
Yukon-Nevada Gold	CAD 0.20	-50.6%	900.0%	0.071
Simmer & Jack	ZAR 1.77	-50.4%	14.2%	0.289
Medoro Resources	CAD 0.47	-50.0%	1466.7%	0.107
Metals Exploration	GBP 0.12	-49.5%	86.7%	0.054
Plexmar Resources	CAD 0.11	-48.8%	214.3%	0.017
Laguna Resources	CAD 0.02	-48.4%	433.3%	0.016
Signature Metals	AUD 0.03	-47.3%	625.0%	0.020
Riverstone Resources	CAD 0.21	-46.8%	223.1%	0.010
US Precious Metals	USD 0.23	-46.5%	91.7%	0.012
Skygold Ventures	CAD 0.23	-46.4%	164.7%	0.019
Mundo Minerals	AUD 0.26	-46.3%	155.0%	0.034
Frontier Mining	GBP 0.07	-45.9%	5200.0%	0.055
Navigator Resources	AUD 0.17	-45.7%	45.3%	0.061
Oxus Gold	GBP 0.09	-45.4%	146.4%	0.056
Metanor	CAD 0.49	-44.9%	50.8%	0.049
Pacific Rim Mining	USD 0.21	-44.7%	200.0%	0.025
Kodiak Exploration	CAD 0.54	-43.8%	9.1%	0.046
UC Resources	CAD 0.09	-43.8%	80.0%	0.011
Elray Resources	USD 0.31	-43.6%	520.0%	0.018
Austral Gold	AUD 0.13	-43.5%	100.0%	0.020
Republic Gold	AUD 0.03	-43.4%	66.7%	0.032
Underworld Resources	CAD 1.50	-43.2%	837.5%	0.058
Beaconsfield Gold	AUD 0.12	-42.9%	14.3%	0.045
Oro Gold	CAD 0.60	-42.9%	421.7%	0.035
Emmerson Resources	AUD 0.25	-42.5%	420.8%	0.052
PC Gold	CAD 0.69	-42.0%	392.9%	0.023
Tanzanian Royalty	CAD 3.77	-42.0%	29.6%	0.323
Evolving Gold	CAD 1.13	-41.8%	510.8%	0.099
Oromin	CAD 0.85	-40.6%	120.8%	0.083
Mosquito	CAD 0.89	-40.3%	408.6%	0.051
Goldminex	AUD 0.60	-40.0%	0.0%	0.038
Harmony	ZAR 80.00	-39.8%	16.4%	4.555
Nimrodel	AUD 0.08	-39.7%	113.5%	0.010
Hawthorne Gold	CAD 0.34	-39.1%	52.3%	0.024
Atlantic Gold	AUD 0.06	-38.0%	55.0%	0.021
Coventry Resources	AUD 0.31	-38.0%	34.8%	0.020
Breakaway Resources	AUD 0.09	-37.9%	233.3%	0.015
Klondex Mines	CAD 1.34	-36.8%	197.8%	0.039
Pele Mountain	CAD 0.19	-36.7%	153.3%	0.018
Gold-Ore	CAD 0.48	-36.0%	242.9%	0.038
Golden West Resources	AUD 0.68	-35.8%	223.8%	0.089
Temex Resources	CAD 0.23	-35.7%	400.0%	0.017
Alexis Minerals	CAD 0.42	-35.4%	82.6%	0.059
MDN	CAD 0.55	-35.3%	31.0%	0.049
Roxmark	CAD 0.20	-35.0%	254.5%	0.038
African Gold Group	CAD 0.62	-34.7%	1966.7%	0.038
Red Rock	GBP 0.02	-34.4%	320.0%	0.014
Axmin	CAD 0.12	-34.3%	228.6%	0.033
Shoreham Resources	CAD 0.27	-34.1%	500.0%	0.015
Banro	CAD 2.24	-33.5%	126.3%	0.225
Benguet Corp.	PHP 11.00	-33.3%	126.8%	0.022
Renison Consolidated	AUD 0.01	-33.3%	700.0%	0.011
Intrepid Mines	AUD 0.28	-33.3%	154.5%	0.109
Australian Solomons	CAD 0.32	-33.3%	1180.0%	0.039
Eaglecrest	CAD 0.05	-33.3%	100.0%	0.016
San Anton Resource	CAD 0.26	-32.9%	628.6%	0.025
Nayarit Gold	CAD 0.49	-32.9%	81.5%	0.042
Exco Resources	AUD 0.24	-32.9%	273.0%	0.108
Paramount Gold	USD 1.30	-32.3%	319.4%	0.132
Conquest Mining	AUD 0.54	-32.1%	285.7%	0.174
Tyhee	CAD 0.18	-32.1%	80.0%	0.034
Dominion Mining	AUD 3.90	-31.5%	30.4%	0.367
Staccato Gold	CAD 0.12	-31.4%	140.0%	0.011
West Wits Mining	AUD 0.10	-31.0%	150.0%	0.011
Bezant Resources	GBP 0.25	-30.6%	455.6%	0.016
Atna Resources	CAD 0.69	-30.3%	119.0%	0.055
Rye Patch Gold	CAD 0.34	-29.9%	257.9%	0.021
Integra Mining	AUD 0.27	-29.9%	86.2%	0.143
Etruscan Resources	CAD 0.47	-29.9%	168.6%	0.148
Allied Gold	AUD 0.41	-28.1%	70.8%	0.216
Western Copper	CAD 1.62	-28.0%	690.2%	0.118
Golden Goose	CAD 0.37	-27.5%	164.3%	0.018
Averages/total		-46.0%	292.9%	10.778
Weighted averages		-48.3%	49.6%
* 12-month
Source: market data; tables compiled by Barry Sergeant